Financial Crisis in Simple English

Financial crisis means liquidation of companies due to shortage of cash and money in liquid form and all these companies are unable to return the money to its owners. In simple words, financial crisis happens when balance sheet of company shows excess of liabilities over assets. Financial crisis is also financial disaster. One of latest example of financial crisis 2007 which happened in USA. Major Banks had become bankrupt. We all know that banks and other financial companies accepts deposits from public at very low rate of interest and then provide it to others as mortgage loan at very high rate. But they have to keep cash in hand. Liquidity risk is always big risk for financial companies. For knowing financial crisis main reasons, you can take reference from previous published “Main Roots of Financial Crisis”. This content was written after reading 8000 word essay “Financial Crisis” on Wikipedia.

I watched also following animated video which tells financial or credit crisis in very simple way. After watching this video, you will understand that in world market, there are two part of financial system. One is householders and other is money holders. When householders need money, they go to bank, bank provides large amount of loan at a very high rate of interest. Using leverage and trading on equity techniques, they earn high profits. Banks provides these loans on the basis of mortgage of houses. But we all know that prices of houses are increasing fastly and this mortgage can be divided into three categories. One is safe; other is ok and third is risky. Via checking from credit rating agencies and providing hedge funds, banks provide loan to all categories of mortgages. But, sometime mortgager becomes defaulter and lending bank takes the house in his passion. But due to tension of payment of loan, house owners start to sell their houses and after this prices of houses is decreased by market. Suppose mortgage loan is $ 300000 and value of house on mortgage will be $ 90000. Now banks situation are not under control. Video shows that this situation is like bomb in the hand of banks and this bomb need little fire to become blast in the form of financial crisis.



The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo

Related: Listen Financial Crisis Podcast